Dissecting Nathan's Oracle Trade

This is so amazing that I just jumped off my seat and felt compelled to come back to my computer to talk about it.


On Friday March 26, Nathan (don't know his last name) came on Option Action on CNBC to suggest the following bullish risk reversal when Oracle (ORCL) was trading at $25.25.


- Sell to open June $23 puts for $0.55


Use the proceeds from above to partially finance:


- Buy to open June $26 calls for $0.80


The whole structure would cost $0.25 net debit.  First of all, there is one thing outright wrong about this trade.  This show comes on Friday after close.  Using the thinkBack feature on TOS, on Friday at the close, the bid on June $23 puts was $0.31 and the ask on June $26 calls was $1.00.  Since the show comes out after close, you would think they would double check their facts, because these prices are way off the chart.  The whole structure would've actually cost you $0.69 net debit versus $0.25 they suggested.


But that is not even the real issue.  Today, Melissa Lee of Option Action alluded that Nathan's bullish risk reversal produced 300% profit because ORCL has rallied 3% since March 26.  


I have no idea how they calculated that.  At today's close, June $23 puts are marked $0.25 and June $26 calls are marked $0.78.  So, if you unwind the whole trade, it will produce $0.53 net credit, while the original cost was $0.69 net debit.   If anything, this is a loss!  I have no idea where they came up with 300% profit.


Finally, there is even a larger issue here.  Lets just forget about all price discrepancies and just assume that trade in reality could've been done at Nathan's price of $0.25 net debit and is currently going for $0.53.  As with any bullish reversal involving sale of naked puts, there will be a margin requirement based on risk that you will have to buy the stock if it falls below the strike where the put is sold.  In this case, using 33% margin requirement and $23  put strike, the maximum cash at risk for every 1 contract sold is $759.  


Assuming you got in at Nathan's price of $0.25 net debit and closed the trade today for $0.53 net credit, you made a whopping $28 on every $759 or about 3.68%.  After subtracting commissions, the real return is probably 1-2%.  And guess what?  The stock is up 3% during this time.  You would've been better off just buying the stock.  I can't get my head around where CNBC calculated 300% profit.  


When you do a bullish risk reversal by selling naked puts, you cannot ignore margin requirement because that is the cash at risk that your broker will not allow to use for other purposes as long as you are in the trade.  You must take that into account when calculating percentage profit.  


If it wasn't this way, then I could've easily announced that I made 52,800% profit on DNDN call ratio spread yesterday.  But I know I didn't.  It would be a lie to say so.  These bozos on Option Action are not trying to properly educate the public.  They're trying to get your attention so the next commercial could be sold for higher price.  


Sorry for my ramblings, but I can't stand people on national TV who create lies to get your attention.  If any of you readers out there strictly followed Nathan's trade and made 300% profit, I beg you to please drop me a note below how you did it.